Benefits of Investing in Commercial Real Estate
Any type of property, whether it's commercial or residential, can be a good investment opportunity. In general, commercial properties typically offer more financial reward, but like all investments, you have to understand what you are investing in.
If you are new to commercial real estate investing, just like any investments, it is important to understand the different types of commercial properties.
Types of commercial properties are:
- office buildings
- retail buildings
- flex space
- industrial buildings
- apartment buildings
- "Mixed use" buildings - combination of uses, such as retail, office and apartments.
Positive Reasons to Invest in Commercial Property
Income potential. Obviously, investors invest in commercial real estate for the earning potential. Commercial properties can have a wide range of annual returns depending on type of property demand, lease structure, maintenance, management, and expenses.
Business vs Residential hours of operation. Businesses usually have business hours and close at the end of the day. Addressing tenants’ issues, businesses usually take place during working hours, where residential investments can take place 7 by 24.
What is a property worth? Commercial property can be very difficult to value because so many factors come into play. The investor needs to purchase a property at a price where they can make the desired return. Paying too much for a commercial property is going to be problematic.
Triple net leases. There are variations to triple net leases, but the basic concept is the tenant pays the expenses on the property, including insurance, real estate taxes, maintenance, utilities, etc. The only expense you'll have to pay is your mortgage. There are several other types of leases besides the triple net lease.
The Downside of Investing in Commercial Property
Time commitment. Real estate compared to other investments can require your time and attention. Depending on the property and lease will depend on how much time commitment.
Professional help. You can manage the property yourself, or you can hire a property manager. If you use a property manager, they will handle your calls and address repairs and maintenance. This will be an added cost that you will have to budget for, and not all management is equal.
Financial requirements. Acquiring a commercial property typically requires more capital. If you finance, you will need at least 20% down. The expenses and upkeep with commercial property can also be expensive, if your tenant is not covering these in the lease. Doing an inspection on the property before you buy is a must, especially on the mechanic and roof.
If you don’t own commercial property and decide it’s something you want to consider, don’t try it alone. look for professionals in this area and seek advice. There are also strategies on how ownership should be taken, and you should always use an attorney for this transaction.